UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

UNITED STATES COMMODITY FUTURES TRADING COMMISSION,

Plaintiff,

v.

DONALD R. WILSON AND DRW INVESTMENTS, LLC,

Defendants.

COMPLAINT FOR INJUNCTIVE AND OTHER EQUITABLE RELIEF AND FOR CIVIL MONETARY PENALTIES UNDER THE COMMODITY CHANGE ACT

ECFCASE

Plaintiff, U.S. Commodity Futures Trading Commission ("Commission" or "CFT '

its attorneys, alleges as follows:

I. SUMMARY

1. Defendants Donald R. Wilson ("Wilson") and his company DRW Investments,

LLC, acting through its agents and employees, including Wilson (collectively, "DRW" or

"Defendants"), on numerous occasions from at least January 2011 through August 2011 (the

"relevant period"), unlawfully placed orders for certain futures contracts with the intent to move

the prices of the contracts in their favor, to increase the value of the futures contract positions

they held in their pmifolio. As a result ofDRW's manipulative scheme, Defendants profited by

at least $20 million, while their trading counterparties suffered losses of an equal amount.

2. As futiher alleged below, DRW's illegal scheme concerned a futures contract

called the IDEX USD Three-Month Interest Rate Swap Futures Contract (the "Three-Month

Contract"), listed by the International Derivatives Clearinghouse ("IDCH"), and offered on the

NASDAQ OMX Futures Exchange ("NFX"). The Three-Month Contract was marketed by

IDCH as an instrument designed to hedge against or speculate on interest rate movements. The

Three-Month Contract could be executed between two parties: a "long" that generally hoped

interest rates would rise over the duration of the contract, and a "short" that hoped rates would

drop. The "price" of the Three-Month Contract was expressed in terms of interest rates. The

long could place a bid for a fixed rate of interest, and, if the bid were accepted, be obligated to

pay that fixed rate throughout the life of the contract. The shmi would receive payments based

on that obligation. Conversely, the shmi was obligated to pay a floating rate, and the long would

receive payments based on that rate.

3. In or about June and July 2010, DRW, having studied the Three-Month Contract

and the pricing and valuation rules ofthe IDCH, concluded that it could exploit the Three-Month

Contract pricing and valuation methodology in DRW's favor. Beginning in or about August

2010, at Wilson's direction, DRW acquired a large long (fixed-rate) position in the Three-Month

Contract with a net notional value in excess of $350 million, which DRW hoped and expected

would grow in value over time. The daily value ofDRW's position was dependent upon the

daily settlement rates of the Three-Month Contract for various maturities, collectively known as

the "IDEX Curve", which IDCH determined each day according to a methodology designed and

published by IDCH. The methodology was dependent upon various data including bids and

offers for the Three-Month Contract that were electronically placed by market participants on the

NFX, to the extent any were placed or pending during preset 15-minute, PM Settlement Period

each day. The prices of bids and offers were expressed as the fixed rate side of the contract that

a bidder would pay and an offeror would receive throughout the duration of the contract. If no

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bids and offers were electronically placed or pending during the time period, then, for many of

the contracts it listed, IDCH would generally default to setting its daily settlement rates, i.e. the

IDEX Curve, to be the same as the prevailing interest rates in corresponding bilateral interest

markets specified in IDCH's rules ("Conesponding Rate(s)").

4. By in or about December 2010, the IDCH-detetmined daily settlement rates ofthe

Three-Month Contract did not rise as high as defendants had hoped and expected because

significant trading in the Three-Month Contract never materialized. However, rather than accept

the prices established by IDCH according to its methodology, Wilson and DRW took matters

into their own hands. DRW developed and executed a manipulative scheme designed to

influence the daily settlement rates of the Three-Month Contract by injecting bids that DRW

knew would never be accepted, and, in turn increase the value ofDRW's positions in the Three­

Month Contract.

5. More specifically, Wilson and DRW manipulated and attempted to manipulate the

daily settlement rates of the Three-Month Contract by strategically placing electronic bids at

higher interest rates than the Conesponding Rates that otherwise would control the contract price

under IDCH' s rules, with the intent to affect or influence the daily settlement rates of the Three­

Month Contract, and by subsequently withdrawing such bids shortly thereafter. Just as in a

"banging the close" scheme, where a trader uses bids or offers to influence a settlement price in

his favor, Defendants' bidding focused on the 15-minute settlement period for the Three-Month

Contract.

6. By implementing this manipulative scheme, Wilson and DRW caused atiificial

prices on the Three-Month Contract over a period of at least 118 trading days. Because Wilson

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and DRW caused artificial prices in multiple maturities each day, the manipulative scheme

affected more than 1,000 contracts.

7. By virtue ofthis conduct, Wilson violated, or aided and abetted in the violation of

Sections 6(c)and 9(a)(2) of the Commodity Exchange Act ("Act"), 7 U.S.C. §§ 9 and 13(a)(2)

(2006 & Supp. IV). Because Wilson, and other agents ofDRW acting at Wilson's direction,

violated the Act by engaging in conduct that was within the scope of their agency or

employment, DRW is vicariously liable for their violations pursuant to Section 2(a)(l)(B) of the

Act, 7 U.S.C. § 2(a)(l)(B) (2006 & Supp. IV).

8. Wilson controlled DRW directly or indirectly, and did not act in good faith, or

knowingly induced, directly or indirectly, DRW's acts constituting the violations alleged in this

Complaint. Therefore, pursuant to Section 13(b) of the Act, 7 U.S.C. § 13c(b) (2006 & Supp.

IV), Wilson is liable as a controlling person for DRW's violations of Sections 6(c) and 9(a)(2) of

the Act, 7 U.S.C. §§ 9 and 13(a)(2) (2006 & Supp. IV). Altematively, Wilson aided and abetted

the violations of Sections 6(c) and 9(a)(2) ofthe Act, 7 U.S.C. §§ 9 and 13(a)(2) (2006 & Supp.

IV), by knowingly assisting in the conduct that led to the violations of those provisions, in

violation of Section 13(a) of the Act, 7 U.S.C. §13c(a) (2006 & Supp. IV).

9. Accordingly, pursuant to Section 6c of the Act, 7 U.S.C. § 13a-1 (2006 & Supp.

IV), the Commission brings this action to enjoin such acts and practices, and compel compliance

with the Act. In addition, the Commission seeks civil penalties and such other ancillary relief, as

the Court deems necessary or appropriate under the circumstances, including, but not limited to,

disgorgement of unlawful profits, restitution and damages.

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II. JURISDICTION AND VENUE

10. This Court has jurisdiction over this action pursuant to Section 6c of the Act, 7

U.S.C. § 13a-1 (2006 & Supp. IV), which authorizes the Commission to seek injunctive relief

against any person, or, to enforce compliance with the Act, whenever it shall appear to the

Commission that such person has engaged, is engaging, or is about to engage in any act or

practice constituting a violation of any provision of the Act or any rule, regulation or order

thereunder.

11. Venue properly lies with this Comi pursuant to Section 6c(e) of the Act, 7 U.S.C.

§ 13a-1 (e) (2006 & Supp. IV), in that Defendants transact business in this District and/or the acts

and practices in violation of the Act have occuned or are occurring within this District.

III. THE PARTIES

12. Plaintiff U.S. Commodity Futures Trading Commission is an independent

federal regulatory agency charged with the responsibility for administering and enforcing the

provisions of the Act, 7 U.S.C. §§ 1 (2006 & Supp. IV) et seq., and the regulations promulgated

thereunder, 17 C.F .R. § § 1.1 et seq. One of its core responsibilities is to protect the public

interest by deterring and preventing price manipulations on the commodity markets and futures

markets, and other disruptions to market integrity.

13. Defendant DRW Investments, LLC is an Illinois limited liability corporation.

Its principal place of business is Chicago, Illinois. DRW is a wholly-owned subsidiary ofDRW

Holdings, LLC. Until January 23, 2013, DRW was registered with the National Futures

Association as a Commodity Trading Advisor. DRW Holdings, LLC maintains an office for

DRW Commodities, a business affiliated withDRW, in New York, New York.

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14. According to DRW's parent company's website, the DRW Trading Group "is a

principal trading organization", or, in other words, all of its trading is for its "own account and

risk", and all of its "methods, systems and applications" are solely for its own use. "Unlike

hedge funds, brokerage firms and banks, DRW has no customers, clients, investors or third pmiy

funds ... [its] trading spans a wide range of asset classes, instruments, geographies and trading

venues, with a focus on trading listed, centrally-cleared instruments".

15. Defendant Donald R. Wilson was at all relevant times the Chief Executive

Officer ("CEO") and Manager ofDRW, and a resident of Illinois. As CEO and Manager,

Wilson acted on behalf of, as agent for, and was authorized to direct the trading of, the Three­

Month Contract on behalf ofDRW.

IV. BACKGROUND FACTS

A. Exchange-Traded Interest Rate Futures Contracts

16. A futures contract is a standardized agreement to buy or sell a commodity for

future delivery at a price determined at the initiation of the contract. Futures contracts are often

used to assume or shift price risk.

17. An interest rate futures contract is "cash settled". In these, instead of purchasing

or selling a physical commodity for delivery, a pmiy buys or sells an obligation to make a cash

payment based on an interest rate. The pmiy who is long the future pays a fixed rate, and the

pmiy who is short the future pays a floating rate. When such a futures contract expires, any

differences in value are settled with a final cash payment. Consequently, the value of an interest

rate futures contract includes the net difference between the net present values of the fixed and

estimated floating cash flows.

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18. In the United States, except in ce1iain legally authorized circumstances, futures

contracts must be negotiated and cleared on a CFTC-registered futures exchange, which is

sometimes referred to as a Designated Contract Market ("DCM"). DCMs act as intermediaries

between the two parties. A recognized method to mitigate credit risk associated with a party to a

futures contract is to utilize a CFTC-registered Derivatives Clearing Organization ("DCO"),

which can "clear" a futures contract. A DCO is a clearinghouse that in this context enables each

party to substitute, through novation or otherwise, the credit of the DCO for the credit of the

parties. In essence, the DCO becomes a "middle man" by standing between the parties and

guaranteeing that each party's financial obligations under the contract will be satisfied. On

December 22,2008, IDCG registered IDCH as a DCO.

19. An exchange-traded futures contract has a daily official "settlement price" or

"closing price" recorded every trading day at the close of trading on the exchange that lists the

contract. A party's open futures contract positions are "marked-to-market" on a daily basis,

meaning that the current day's daily settlement price is applied to the pmiy' s open position in the

contract, resulting in a value for the position.

20. "Variation margin" (sometimes referred to as "maintenance margin") is a daily

payment of profits and losses after a party's positions are marked-to-market. A party that has

position with negative value must pay margin. A party that has a position with a positive value

receives margin. These margin payments are made to and by the exchange, and not directly

between pmiies.

21. A variation margin payment transfers ownership of the property transferred, and

the recipient of variation margin payments enjoys the benefits of such ownership- for example,

he can invest those funds for gain. Thus, the fixed payer (long) of an interest rate futures

7

contract receives variation margin when interest rates increase and pays variation margin when

interest rates decrease. Over time, this gives the longs an advantage over the shorts because they

are paying and receiving variation margin at interest rates that benefits them at the expense of the

shmis. This advantage is known as "convexity bias."

22. The shmis may elect to counteract this bias for any contracts not yet executed if,

collectively, they demand that the longs pay higher fixed interest rates in compensation at the

time the terms of the agreement are set. 1 These higher fixed rates resulting from the shorts'

collective action is known as the "convexity effect." The convexity effect requires at least two

preconditions: (a) market knowledge of the benefit accruing to those paying fixed rates in an

interest rate contract; and (b) collective action by the shmis demanding higher rates in

compensation. Market liquidity may also impact whether a convexity effect arises.

Accordingly, an interest rate futures contract may not include a convexity effect either by lack of

market knowledge, collective action by the shorts, or market liquidity.

23. Convexity bias can also be counteracted by rule. For example, during the relevant

period, some exchanges that listed interest rate futures contracts applied a pricing adjustment

known as a "Price Alignment Interest" or "P AI" to eliminate this financial advantage to the long

position. IDCH did not apply a P AI, or any other rule to counteract convexity bias, as Wilson

and DRW well knew.

B. IDCH's Exchange-Traded Interest Rate Futures Contracts

24. At all times relevant to this Complaint, IDCH was headquatiered in New York,

New York. During all times relevant to this Complaint, IDCH was a wholly-owned subsidiary

1 The demand for higher compensation in the form of higher fixed rates at the outset of an agreement will not benefit existing, short open positions because the terms of those agreements have ah·eady been set. In fact, as explained below in paragraph 32, higher rates demanded by shmts to induce them to enter into a contract with convexity bias will actually negatively impact any existing, shmt open position.

8

oflnternational Derivatives Clearing Group, LLC ("IDCG"), also with headquarters in New

York, New York. IDCG was a subsidiary of NASDAQ OMX Group, Inc. also headquatiered in

New York, New York. NASDAQ operated the NFX exchange, a DCM under the Act. IDCH

listed contracts it called "IDEX" interest rate futures contracts on NFX.

25. Market participants were able to obtain IDCH cleared interest rate

futures, such as the Three Month Contract, in two ways. First, counterparties could execute an

interest rate agreement bilaterally and then clear that agreement through IDCH. Using this

process, the patties' bilateral contract was novated and a corresponding interest rate futures

position was created.

26. Another method of establishing a position in an "IDEX" interest rate futures

contract was for a patiy to place a bid at a cetiain interest rate, if it desired to be the long (paying

the fixed rate cash flow and receive the floating rate cash flow), or an offer, if it desired to be the

short (paying the floating rate cash flow and receiving the fixed rate). If such a contract was

executed, the long was obligated to pay the fixed rate at which he placed his bid throughout the

life of the contract, and the short was obligated to pay the floating rate. Regardless of which

method was employed, the "price" of the IDCH IDEX interest rate futures contracts was

expressed in terms of interest rates.

C. IDCH Rules Governing The Three-Month Contract and Net Present Value

27. On August 10, 2010, IDCH publicly issued its Rulebook, informing

the market, among other things, how it would calculate settlement prices and value a patiy' s

position in listed contracts including Three-Month Contract? In accordance with the IDCH

2 The Rulebook was renumbered, but not substantively changed, on September 1, 2010. The Complaint cites to the Rulebook numbers established by the September 1, 2010 IDCH Rulebook, that were in place for the remainder ofthe period relevant to this Complaint.

9

Rulebook, new Tluee-Month Contracts were listed each trading day in 14 different maturities

that ran from two to 30 years. The NFX trading hours for the Tillee-Month Contract were from

7 a.m. to 5 p.m. Eastern Time ("ET"), Monday through Friday.

28. The Rulebook set fmih the precise method IDCH employed to establish the daily

net present value of a party's open position in the Three-Month Contract and all other IDEX

contracts. The net present value was the basis for determining a patiy' s daily profits and losses,

and, as a result, the variation margin that a pmiy paid or received on a daily basis. IDCH Rules

provided that the net present value of an open position in a contract was based on "valuing each

leg of the cash flows of the contract (fixed and floating) according to the discount factors

generated by the IDEX Curve." The IDEX Curve employed to determine the daily net present

value was the one "that corresponds to the fixed rate" pmiion of the contract and was composed

of the daily settlement rates offomieen different maturities of the Tillee-Month Contract. The

IDCH rules did not provide for any adjustment to the daily settlement price to counteract any

convexity bias that might arise. In other words, the value of a party's position, and the daily

variation margin it would pay or receive, depended on the IDEX Curve, which was a line graph

plotting interest rates versus maturities ranging from two years to 30 years. For margining

purposes, IDCH populated the IDEX Curve with interest rates twice a day: (a) between 10:45

and 11:00 a.m. ET (9:45 and 10:00 a.m. Central Time ("CT")) (the "AM Settlement Period") and

(b) between 2:45 and 3:00p.m. ET (1 :45 and 2:00p.m. CT) (the "PM Settlement Period"). (The

AM Settlement Period and PM Settlement Period are together referred to as the "Daily

Settlement Periods"). The following graph is an example of the IDEX Curve for the Three­

Month Contract, on December 23, 2010, for the End-of-Day ("EOD") PM Settlement Period:

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lOCH EOD Curve on 12/23/2010 4.50 ,--~~~~~~~~~~~~~~~~~~~~~~~-

4.00 +---~~~~--~~~~--~~~~~--

3,50 ·----- -- ----- ------·-·----------------------------

3,00 --~-------~-------- -~------------- ----------·- -------------------

I.SO ·

:: j' .. -~~------------------------------=-----~

0.00 .,-----,--------,~-----,-~-.--~-.-~--,-~,--- ---,------,,-------,---,---------,

~ ~ ~ ~ ~ ~ ~ ~ ~ E ~ ~ ~ ~

29. IDCH used the PM Settlement Period to determine the daily settlement rates of all

fourteen maturities of the Three-Month Contract. In the absence of electronic bids and offers

made during the PM Settlement Period, IDCH used widely available information concerning the

Corresponding Rates in related markets to establish the IDEX Curve.

30. In this regard, if at least one bid was electronically placed or pending during the

fifteen-minute PM Settlement Period, IDCH would either (a) incorporate the exact rate that was

bid or (b) a substantially similar rate through a curve smoothing calculation, into the IDEX

Curve instead of the default Corresponding Rates.

31. For example, if a 5% bid for the Three-Month Contract with a 30-year maturity

was electronically placed during the PM Settlement period, and no other bids were placed, the

IDEX Curve would generally reflect a settlement rate of 5% for the 30-year contract, even if the

prevailing Corresponding Rate was only 4.75%. In this example, as a result of the electronic bid,

the contract for the 30-year maturity would close with a higher daily settlement rate than in the

11

absence of the electronic bid, i.e., the IDEX curve would be higher for the 30-year maturity than

it otherwise would have been by 0.25%, which is 25 basis points.

32. Relatively higher IDEX Curves- higher floating rates- positively impacted the

net present value of an open long position (which receives the floating rate) and negatively

impacted the net present value of an open short position (which pays the floating rate). As a

result, relatively higher IDEX Curves tilted the variation margin cash flows in favor of an open

long position- increasing the amount of variation margin that an open short position would pay

and that an open long position would receive.

33. IDCH rules did not provide for any mechanism to counteract the Three-Month

Contract's convexity bias. Accordingly, the Three-Month Contract's convexity bias could only

be counteracted legitimately by shorts demanding higher fixed rates at the time of execution of

the contract. This, of course, would negatively impact any existing, short open position and

benefit any existing, long open position.

V. THE DEFENDANTS' CONDUCT

34. Wilson and DRW developed and implemented a manipulative strategy designed

to affect or influence the daily settlement rates of the Three-Month Contract after Wilson and

DRW had established a significant long open futures position in the Three Month Contract

through the bilateral process described above. On a majority of trading days during the relevant

period, Wilson and DRW intended to affect or influence, and did affect or influence, the prices

of Three-Month Contracts by, during the PM Settlement Period, repeatedly placing electronic

bids significantly above the Corresponding Rates that they knew, under the published IDCH

rules and procedures, would otherwise determine the IDEX Curve. By doing so, Defendants

intended to and did affect or influence the daily settlement rate of the Three-Month Contracts

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and, in tum, the IDEX Curve, all for the ultimate purpose of driving-up the value ofDRW's

positions.

A. DRW, through its Agents, including Wilson, Planned to Exploit a Perceived Flaw in the Three-Month Contract

35. In or about June and July 2010, Defendants researched the Three-Month Contact,

including how IDCH generated the IDEX Curve and how IDCH determined the net present value

of a party's open positions. As an employee of IDCH observed on June 18, 2010, "[i]t seems

that DRW is trying to understand ou[r] [IDEX] curve construction methodology with a degree of

precision that we have not seen from other clients". On July 23, 2010, Wilson drafted an email

to several of his subordinates including DRW's head of Quantitative Analysis noting that among

his priorities were "to really understand IDCG". He directed them to "[c]onfirm the contract has

full convexity bias (despite the fact they will force it to settle at non-convexity biased prices)".

36. As a result of this research, Defendants understood that the IDCH contract

possessed convexity bias (meaning that the longs would receive and pay variation margin at

beneficial rates) and expected that that the shmis would respond collectively, causing a

convexity effect, which would raise the prices of newly formed IDCH contracts and positively

impact the value of existing long open positions. Defendants also understood that IDCH did not

apply a P AI to adjust the daily settlement rate and lower the IDEX Curve. As a result of the

absence of a PAl adjustment, Defendants came to believe that the Three-Month Contract would

carry a convexity effect which would, in their opinion, cause the daily settlement rates on the

IDEX Curve to move higher, inuring to the benefit of patiies that held existing open long

positions in the Three-Month Contract.

37. Defendants believed that by acquiring substantial Three-Month Contract long

positions they could exploit the fact that IDCH did not apply a PAl adjustment. On August 30,

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2010, one of the DRW Traders noted that the Three-Month Contract is "flawed and we are

working on taking advantage ofthe PAl/Convexity flaw". As this trader acknowledged during

the course of the CFTC's investigation of this matter, DRW's goal was to "buy as much of this

stuff as i could at prices that I thought were cheap because, yes, where I thought they were

valued [] much higher". Put another way, Defendants believed that in the absence of the PAl

adjustment, they could acquire Three-Month Contracts at prices that were relatively low, and that

the value of their positions would increase over time by a greater amount than they would

increase if IDCH did apply a P AI.

38. As further alleged below, however, prices did not rise to meet the expectations of

Defendants, at least prior to the time they took matters into their own hands and began to place

manipulative bids.

B. DRW Established Open Positions in the Three-Month Contract

39. On August 13,2010, IDCH authorized DRW to trade the Three-Month Contact.

From that day through at least October 2010, DRW accumulated a long position in the Three­

Month Contract based on Wilson's belief that the contracts were undervalued due to the absence

of a P AI adjustment.

40. By September 30, 2010, DRW had acquired a substantial net long position of

approximately 3,500 contracts with a total net notional value of $350 million. For most of the

period relevant to this Complaint, DRW held nearly 90% of all of the long positions held by all

parties in the Three-Month Contract.

41. From August through October 2010, DRW bid for and acquired long positions in

the Three-Month Contract through a voice broker, Newedge USA, LLC ("Newedge"), a firm that

would find patiies interested in taking the short position. The deals were consummated through

the bilateral process described above.

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C. Wilson's and DRW's Profit Expectations Were Initially Frustrated When Prices Did Not Rise as High as They Expected

42. At least by October 2010, Wilson and DRW believed that the Three-Month

Contract should have been settling at considerably higher rates than the Corresponding Rates

because they had presumed that a convexity effect would have driven the daily settlement rates

higher. For example, analysts employed by DRW believed at the time that the 10-year Three-

Month Contract should have been trading 140 basis points (1.4%) higher than the Co11'esponding

Rate for that Three-Month Contract. In November 2010, Wilson and DRW staff concluded that

the Three-Month Contract should have been trading 240 basis points (2.4%) higher than the

Co11'esponding Rate.

43. However, at least until the end of2010, the convexity effect in the pricing ofthe

Three-Month Contract that Wilson and DRW anticipated did not materialize-the daily

settlement rates did not rise to the point that Wilson and DRW had predicted perhaps because

there was very little, if any, trading ofthe contract. That is, based on legitimate market forces,

and upon application ofiDCH's published methodology, IDCH determined that the daily

settlement rates of the Three-Month Contract should be the same as the Co11'esponding Rates,

and not the higher rates predicted by DRW management and staff when they established DRW's

positions.

44. In November and December 2010, Wilson and other DRW senior management

communicated with IDCH senior management concerning the settlement rates. Wilson

expressed his frustration to IDCH that the Three-Month Contracts' daily settlement rates were

not higher than the Coll'esponding Rates. Wilson and DRW were displeased with the lower rates

because they translated into lower profits for DRW.

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45. By in or about November 2010, Wilson and DRW understood that bids placed.

electronically during the PM Settlement Period could affect the daily settlement rates of the

Three-Month Contracts. Wilson and DRW decided to take advantage of that process by

electronically placing bids at rates that were higher than Conesponding Rates during the PM

Settlement Period, to unlawfully push the settlement rates higher.

46. On November 3, 2010, the unlawful plan was explained by one DRW trader to a

colleague: "I think what we will have to do is at 10:00am send our offers to IDCG directly to

move the 1 Oam settles and then do the same at the close". Although that trader apparently

mistakenly believed that electronic bids in both Daily Settlement Periods (a.m. and p.m.)

affected the daily settlement rates, the plan was clear -place electronic bids to push the daily

settlement rates. By the time they actually began to place their electronic bids in early 2011,

Wilson and DRW knew that activity in the PM Settlement Period alone drove the relevant Three­

Month Contract daily settlement rates.

D. DRW's Manipulative Electronic Bids in the PM Settlement Period

47. DRW did not have the capacity to place electronic bids on NFX directly. Rather,

on January 21, 2011, it retained the services of a third-party fitm, Sky Road LLC ("Sky Road"),

which had direct electronic access to NFX, for the sole purpose of placing electronic bids to

affect or influence the daily settlement rates ofthe Three-Month Contract. DRW had no

business purpose for retaining Sky Road other than to carry out the manipulative scheme.

48. On January 24, 2011, DRW began placing electronic bids through Sky Road for

Three-Month Contracts. To ensure they affected the daily settlement rates ofthe Three-Month

Contracts, DRW concentrated its bids during the PM Settlement Period, between 1:45 p.m. and

2:00p.m. CT, and then quickly withdrew them. From January 24, 2011 to August 31, 2011,

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DRW placed more than 2,400 bids for the long side of Three-Month Contracts. Based on the

trading data analyzed by the CFTC, nearly 60% ofDRW's bids were placed or remained open

during the fifteen-minute PM Settlement Period. On at least 13 days, all ofDRW's bids

occuned during the narrow PM Settlement Period.

49. The maturities that most directly affected DRW's profits, via the IDEX Curve,

were the 7, 8, 9, 10, 12, 15, 20, 25, and 30-year maturities of the Three-Month Contract. It was

therefore no coincidence that viliually all (99.96 %) ofDRW's electronic bids were placed for

contracts of maturities from 7 to 30-years, and that almost none (0.04%) were placed for

contracts of shmier maturities. In other words, DRW, through its agents, including Wilson,

focused its bids, and subsequently manipulated, only the futures contracts that most directly

affected its profits.

50. On February 18,2011, DRW's General Counsel wrote to IDCH and admitted in

words and substance that DRW intended to and did enter bids during the PM Settlement Period

for the purpose of affecting the IDEX Curve.

51. DRW staff injected bids higher than the prevailing Conesponding Rates during

the PM Settlement Period with the intent to affect or influence the Three-Month Contracts' daily

settlement rates. This was done at the direction of Wilson. From January 24, 2011, through

August 2011, the difference between the rates bid by DRW electronically and the Corresponding

Rates grew, as DRW placed increasingly higher bids relative to those rates. The Three-Month

Contracts' daily settlement rates affected by DRW's injected bids were artificial for a number of

reasons, including that they did not result from legitimate bids. DRW's bids were not legitimate

because DRW's intent in making the bids through its manipulative scheme was to influence the

17

Three-Month Contracts' daily settlement rates, and primarily not to consummate trades on an

exchange where nobody traded.

52. The higher DRW's bids as compared to the Co11'esponding Rates, the greater the

financial reward to DRW. The following chart reflects the increase in DRW's bids in the 30-

year maturity of the Three-Month Contract, during the PM Settlement Period, over time, as

compared to Co11'esponding Rates, based on the trading data analyzed by the CFTC:

Difference between DRW's bids in the 30-yeartenor during the daily PM Settlement Period on the IDCH and the prevailing

Corresponding Rate for the 30-year tenor as calculated by lOCH 120.0 ,~-------------------------------

1.~ ~ • 100.0 i~--~----------------------------!".'-

~ ~ e tif l!o.o i~----------------~---------.iC:'-----~.g Ill'-- __ .., ~·-~~-~-J.: r;; • •. "' • c;l! 60.0 -t---------------~--------------------95 •" £ e 6 § ~i 40.0 ~-------·~-------~---------------.• .. § a;J~'P c ,w j 20.0 +--.'"'--------------------------

/ "' ~ ~ i5 :1 ~ " ;;! ::1 ::l

~ " ::1 ::l ~ ::1 ::l ~ ::l ~

~ ...

0 0 g. g, 0

~ g. g,

~ g g,

~ N

~ " " 11 a g ~ ~ ~ " " ~ "' ~ ~ "' "' ;;, ;;, s £ ... ...

Date

53. On February 3, 2011, DRW's head of quantitative research wrote to Wilson and

confirmed that DRW's plan was working. As she remarked to Wilson, as a result of the "new

regime", the "IDCG settle curve is [now] DRW defined".

54. Wilson acknowledged during the course of the CFTC's investigation of this

matter that DRW intentionally injected increasingly higher bids than prevailing Corresponding

Rates:

Well, initially when we put the trades on we statied off paying, you know, maybe a basis point higher rate than the [Co11'esponding

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Rates] at the time. And eventually we, you know, tried to pay two basis points over and then we bid three basis points over ...

And so, you know, eventually we were bidding three, four, five basis points over because we thought that we had positive expected value in doing so.

55. While Wilson admitted to bidding "five basis points over" prevailing

Conesponding Rates, in fact DRW bid as many as 101.04 basis points higher than those rates.

56. DRW increased the number of Three-Month Contract maturities the firm bid on

during the PM Settlement Period, to push-up a greater swath of the IDEX Curve. As Wilson

stated during the course of the CFTC's investigation of this matter, he directed DRW Traders to

bid for more maturities to influence more points on the IDEX Curve:

And then during certain points of the day we would actually input more points on the curve so that IDCG's ... settlement curve didn't have a bunch of weird kinks in it. So I was aware of all that and certainly involved in discussing with the traders how we were putting those prices in and moving them around.

57. After the PM Settlement Period each day, DRW would regularly cancel its bids,

which avoided the possibility that DRW would actually have to enter into a futures contract and

pay the higher rates that it bid. In fact, none ofDRW's electronic bids were accepted or "hit" to

consummate an actual transaction. Yet, all of its bids during the PM Settlement Period pushed

the Three-Month Contract settlement prices higher than they would have been in the absence of

DRW's bids.

E. DRW, through its Agents, Including Wilson, had the Ability to and did Affect the Settlement Prices

58. Wilson and DRW had the ability to affect the Three Month Contract due the fact

that very few of these contracts were executed on the NFX. On at least 118 trading days that

DRW manipulated the daily settlement rates, there was not a single consummated on-exchange

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trade of the Three-Month Contract, and DRW alone, placed 100% of the electronic bids for long

positions during this period; there were no offers for short positions placed at all. Wilson and

DRW were well aware of these facts as they inserted bids to affect the settlement rate. As in the

words of one DRW trader, the Three-Month Contract was the "ultimate of illiquid products."

59. DRW's manipulative scheme was successful in creating artificial prices,

expressed in rates. For example, on February 25, 2011, for the twenty-fomih trading day in a

row, DRW was the only market participant placing orders on the Three-Month Contract during

the entire day. No exchange trading activity took place until the PM Settlement Period, between

2:45 and 3:00p.m. ET. Then, between 2:51p.m. and 2:53p.m. ET, DRW placed bids

electronically for 250 contracts in each of nine different maturities of the Three-Month Contract

(2,250 contracts in all), from the 7-year to the 30-year. DRW cancelled these bids between 3:05

and 3:06p.m. ET. As detailed in the chart below, each ofDRW's bids, which became the

February 25th daily settlement rate for the corresponding Three-Month Contract, was well in

excess of the Corresponding Rate, which would have been the settlement rate in the absence of

DRW's manipulative bid:

Manipulative Bids on February 25, 2011

Maturity DRWBid Corresponding A1iificial Rate Increase Rate(%) Rate(%) Amount (basis points)

7-year 3.174 2.995 17.9

8-year 3.403 3.211 19.2

9-year 3.600 3.393 20.7

10-year 3.747 3.539 20.8

12-year 3.976 3.769 20.7

15-year 4.201 3.993 20.8

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20-year 4.473 4.165 30.8

25-year 4.554 4.248 30.6

30-year 4.597 4.290 30.7

60. Just as they did on February 25 in the above example, from January 24, 2011 to

August 13, 2011, Wilson and DRW, executed a manipulative scheme with the intent and ability

to influence prices, and caused artificial prices on at least 118 trading days, involving at least

1,032 Three-Month Contracts, reaping unlawful profits of at least $20 million.

61. In February, 2011, Wilson had a teleconference with an official of another market

participant, in part, about DRW's trading conduct. In the call, the official notes to Wilson and

DRW's conduct is indicative of manipulation, stating in relevant part that the DRW bids "go up

at 2:45 every day so they make sure the marks screw other people ... You get to set the mark".

Despite the fact that another market participant viewed their conduct as unfair and manipulative,

Wilson and DRW continued manipulating the market through August 2011.

VI. VIOLATIONS OF THE COMMODITY EXCHANGE ACT

COUNT I

MANIPULATION OF THE PRICE OF THE IDEX USD THREE-MONTH FUTURES CONTRACTS

62. Paragraphs 1 through 61 are realleged and incorporated herein by reference.

63. Sections 6(c) and 9(a)(2) ofthe Act, 7 U.S.C. §§ 9 and 13(a)(2)

(2006 & Supp. IV), make it unlawful for any person to manipulate or attempt to manipulate the

market price of any commodity in interstate commerce, or for future delivery on or subject to the

rules of any registered entity, including any contract market.

64. Wilson and DRW, acting through its agents and employees, intended to affect or

influence and did affect or influence the daily settlement rates of the Three-Month Contracts

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during the relevant period. Accordingly, Wilson and DRW violated Sections 6(c) and 9(a)(2) of

the Act, 7 U.S.C. §§ 9 and 13(a)(2) (2006 & Supp. IV).

65. Section 2(a)(l)(B) of the Act, 7 U.S.C. § 2(a)(l)(B) (2006 & Supp. IV), provides

that the act, omission or failure of any official, agent, or other person acting for any corporation

within the scope of his employment shall be deemed the act of the corporation. Because Wilson,

and other DRW agents and employees, were agents or employees ofDRW and their actions that

violated Sections 6(c) and 9(a)(2) of the Act were within the scope of their agency or

employment, DRW is liable for those violations pursuant to Section 2(a)(l)(B) of the Act.

66. Wilson controlled DRW directly or indirectly, and did not act in good faith, or

knowingly induced, directly or indirectly, DRW's acts constituting the violations alleged in this

Count. Therefore, pursuant to Section 13(b) of the Act, 7 U.S.C. § 13c(b) (2006 & Supp. IV),

Wilson is liable as a controlling person for DRW's violations of Sections 6(c) and 9(a)(2) of the

Act, 7 U.S.C. §§ 9 and 13(a)(2) (2006 & Supp. IV).

67. Each and every day the daily settlement rates of the Three-Month Contracts

described above were miificial as a result or pmiial result of Wilson's and DRW's conduct is

alleged herein as a separate and distinct violation of Sections 6(c) and 9(a)(2) of the Act, 7

U.S.C. §§ 9 and 13(a)(2) (2006 & Supp. IV).

68. Alternatively, Wilson aided and abetted the violations of Sections 6( c) and 9(a)(2)

of the Act, 7 U.S.C. §§ 9 and 13(a)(2) (2006 & Supp. IV), by knowingly assisting in the conduct

that led to the violations of these provisions, in violation of Section 13(a) of the Act, 7 U.S. C.

§13c(a) (2006 & Supp. IV).

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COUNT II

ATTEMPTED MANIPULATION OF THE PRICE OF THE IDEX USD THREE-MONTH FUTURES CONTRACTS

69. Paragraphs 1 through 61 are realleged and incorporated herein by reference.

70. Sections 6(c) and 9(a)(2) ofthe Act, 7 U.S.C. §§ 9 and 13(a)(2) (2006 & Supp.

IV), make it unlawful for any person to attempt to manipulate the market price of any

commodity in interstate commerce, or for future delivery on or subject to the rules of any

registered entity, including any contract market.

71. Wilson and DRW, acting through its agents and employees, intended to affect or

influence the daily settlement rates of the Three-Month Contracts during the relevant period.

Wilson and DRW engaged in repeated overt acts in furtherance of that intent. Accordingly,

Wilson and DRW violated Sections 6(c) and 9(a)(2) of the Act, 7 U.S. C. §§ 9 and 13(a)(2) (2006

& Supp. IV).

72. Section 2(a)(l)(B) of the Act, 7 U.S.C. § 2(a)(1)(B) (2006 & Supp. IV), provides

that the act, omission or failure of any official, agent, or other person acting for any corporation

within the scope of his employment shall be deemed the act of the corporation. Because Wilson,

and other DRW agents and employees, were agents or employees ofDRW and their actions that

violated Sections 6(c) and 9(a)(2) ofthe Act were within the scope of their agency or

employment, DRW is liable for those violations pursuant to Section 2(a)(1)(B) of the Act.

73. Wilson controlled DRW directly or indirectly, and did not act in good faith, or

knowingly induced, directly or indirectly, DRW's acts constituting the violations alleged in this

Count. Therefore, pursuant to Section 13(b) of the Act, 7 U.S.C. § 13c(b) (2006 & Supp. IV),

Wilson is liable as a controlling person for DRW's violations of Sections 6(c) and 9(a)(2) of the

Act, 7 U.S.C. §§ 9 and 13(a)(2) (2006 & Supp. IV).

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74. ·Each and every day the daily settlement rates of the Three-Month Contracts

described above were artificial, as a result or partial result of Wilson's and DRW's conduct, is

alleged herein as a separate and distinct violation of Sections 6(c) and 9(a)(2) of the Act, 7

U.S.C. §§ 9 and 13(a)(2) (2006 & Supp. IV).

75. Alternatively, Wilson aided and abetted the violations of Sections 6(c), 6(d), and

9(a)(2) of the Act, 7 U.S.C. §§ 9, 13b, and 13(a)(2) (2006 & Supp. IV) by knowingly assisting in

the conduct that led to the violations of these provisions, in violation of Section 13( a) of the Act,

7 U.S.C. §13c(a) (2006 & Supp. IV).

VII. RELIEF REQUESTED

WHEREFORE, the Commission respectfully requests that this Comi, as authorized by

Section 6c of the Act, 7 U.S.C. § 13a-1(2006 & Supp. IV), and pursuant to its own equitable

powers:

A. Find Defendants liable for violating Sections 6(c) and 9(a)(2) of the Act, 7 U.S.C.

§§ 9 and 13(a)(2) (2006 & Supp. IV);

B. Enter an order of permanent injunction restraining and enjoining Defendants and

any of their affiliates, agents, servants, employees, successors, assigns, attorneys, and persons in

active conceti with them who receive actual notice of such order by personal service or

otherwise, from directly or indirectly violating Sections 6(c) and 9(a)(2) of the Act, 7 U.S.C. §§

9 and 13(a)(2) (2006 & Supp. IV);

C. Enter an order directing Defendants to pay civil monetary penalties, to be

assessed by the Comi, in an amount not to exceed $1,000,000 or triple the monetary gain to them

for each violation of the Act, as described herein;

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D. Enter an order providing for such other and further remedial and ancillary relief,

including, but not limited to, restitution, disgorgement, damages to all persons affected by

Defendants' actions, trading suspensions, and trading bans, as this Court may deem necessary

and appropriate; and

E. Enter an order requiring Defendants to pay costs and fees as permitted by 28

U.S.C. §§ 1920 and 2412(a)(2) (2006 & Supp. IV).

Dated: _l_l _, k__, 2013 Respectfully Submitted, ~

~~-~ Michael R. Berlowitz ATTORNEY FOR PLAINTIFF U.S. COMMODITY FUTURES TRADING COMMISSION 140 Broadway, 19th Floor New York, NY 10005 (646) 746-9759 (telephone) (646) 746-9940 (facsimile) MBerlowitz@cftc.gov

Joan M. Manley Paul G. Hayeck A. Daniel Ullman II (pro hac vice admission pending) Jason Mahoney (pro hac vice admission pending) Sophia Siddiqui (pro hac vice admission pending) Division ofEnforcement

ATTORNEYS FOR PLAINTIFF COMMODITY FUTURES TRADING COMMISSION 1155 21st Street, N.W. Washington, D.C. 20581 (202) 418-5334 (telephone) (202) 418-5523 (facsimile)

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